Compensation Events in NEC & Practical Issues … · Compensation Events in NEC & Practical Issues...

Compensation Events in NEC & Practical Issues

Arising from Managing NEC Projects

Presented by KK Cheung, Partner, Joseph Chung, Associate and Allen

Lai, Senior Consultant of Charlton Martin Consultants Limited

Presented on 17 December 2013

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Today’s roadmap

Introduction – KK

Compensation Events – Joseph

Administering Compensation Events – Joseph

Impact of Early Warning Procedure – Joseph

NEC Cases of Interest – Joseph

Practical issues arising from managing NEC

projects – Allen

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Introduction (1)

Under traditional standard form contracts, which

talks of extensions of time and variations, NEC 3

does not use such terminologies. Instead, it talks of

“changes” and “compensation event”

The main provisions relating to compensation

events are set out in Section 6 of the Engineering &

Construction Contract (ECC)

Under ECC, changes is a package of time and

money i.e. for every compensation event, the effects

on the programme and contract sum (Prices) are

considered at the same time

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Introduction (2)

The set up of the compensation event mechanism is

that the earlier a compensation event is identified,

the more likely its effect can be reduced or better

still, avoided

Early Warning Procedure

The compensation event mechanism also tries to

prevent the Contractor from being out of pocket for

events that are outside its control

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Introduction (3)

Section 6 sets out:

list of compensation events

procedure for notifying, assessing and implementing

the compensation event

The above will be looked at in turns

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Compensation Events (1)

Compensation event is not defined in the ECC. However, compensation event can simply be referred to as an event which triggers the reassessment of Prices, Completion Date and Key Dates

typically, they will be events which are at the Employer’s risk

Core Clause 81.1: risks that are not specifically identified as being the Employer’s risks are at the Contractor’s risk

Today’s talk will focus on the compensation events set out in Core Clause 60.1

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The Project Manager gives an instruction changing the Works Information (Core Clause 60.1(1)) e.g. addition or deletion of work, change to specifications, issue of revised drawings

triggering event is instruction that changes the Works Information

the instruction must come from the Project Manager not the Employer or else the Contractor is not entitled to claim

frequent dispute is whether the instruction provides for interpretation of the Works Information or changes to the Works Information

exceptions:-

• change made in order to accept a Defect. By Core Clause 44.1, the Contractor and the Project Manager may propose to the other that the Works Information should be changed so that a Defect does not have to be corrected. This may occur where the time and costs for rectifying a defect may be disproportionate with the benefit to be obtained from the rectification

• changes by the Contractor to its part of the Works Information

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The Project Manager or the Supervisor does not reply to a communication from the Contractor within the period required by the Contract (Core Clause 60.1(6))

various clauses in the ECC will stipulate the period within which the Project Manager is to respond. Such timeframe may be extended by agreement between the Project Manager (as opposed to the Supervisor) and the Contractor. The Project Manager’s failure to reply within the stipulated period will amount to a compensation event

if timeframe is not stated, the default timeframe will be that stated in “period for reply” in the Contract Data. Note that this default provision only applies where the Contract requires the Project Manager or the Supervisor to reply

in practice, this event is difficult to rely upon as it would be difficult for the Contractor to show that the delay by the Project Manager in replying resulted in the Contractor incurring delay and extra cost

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The Project Manager or the Supervisor changes a

decision which he has previously communicated to

the Contractor (Core Clause 60.1(8))

the rationale for this is that a change in decision is

likely to result in extra work for the Contractor and

thus a compensation event

decision is not defined under the ECC but should be

confined to decisions which the Project Manager or

the Supervisor is required to make under the

Contract

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The Project Manager withholds an acceptance (other than acceptance of a quotation for acceleration or for not correcting a Defect) for a reason not stated in the Contract (Core Clause 60(9)) various clauses in the ECC requires the Contractor to submit

proposals to the Project Manager. Each of those clauses would also set out the reasons for which the Project Manager can refuse acceptance

Core Clause 60(9) will trigger where the Project Manager withholds an acceptance for reasons not specified in the Contract

what if Project Manager does not respond? – compensation event under Core Clause 60(6)

what if the Project Manager withholds an acceptance for an invalid reason but there was existing valid reason to withhold acceptance – arguably a compensation event

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The Contractor encounters physical conditions which: are within the Site

are not weather conditions; and

an experienced contractor (objective test) would have judged at the Contract Date to have a small chance of occurring that it would have been unreasonable for him to have allowed for them (Core Clause 60.1(12)) • under this clause, the risk for physical conditions is upon the

Employer

• the clause is not simply confined to ground conditions. Physical conditions could be natural or man made

• the usual disclaimer in the instructions to tenderers will not relieve the Employer of his responsibilities?

• the Employer could of course delete this compensation event using Option Z in which case, all risks for physical conditions would be upon the Contractor

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Core Clause 60.1(12) needs to be read in conjunction with Core Clauses 60.2 and 60.3

by Core Clause 60.2, when assessing this compensation event, the Contractor is assumed to have taken into account:-

• the Site Information

• publicly available information referred to in the Site Information

• information obtainable from a visual inspection of the Site

• other information which an experienced contractor could reasonably expected to have or to obtain

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by Core Clause 60.3, any ambiguities or

inconsistencies in the Site Information on physical

conditions would be interpreted in favour of the

Contractor

it is therefore important for the Employer to provide

as much information as possible on the physical

conditions

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An event which is Employer’s risk stated in the

Contract (Core Clause 60.1(14))

need also to cross-refer to Core Clause 80.1 and part

1 of the Contract Data to identify matters which are at

the Employer’s risk

Core Clause 80.1 includes fault of the Employer or a

fault in the design, loss of or damage to Plant and

Materials supplied to the Contractor by the Employer

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Breach of contract by the Employer which is not one of the compensation events listed (Core Clause 60.1(18))

sweep up provision

note Core Clause 63.4 which provides that the rights of the Employer and the Contractor to changes to the Prices, the Completion Date and the Key Dates are their only rights of a compensation event

• does Core Clause 63.4 read in conjunction with Core Clause 60.1(18) exclude the Contractor’s remedies for the Employer’s breach of the Contract? - unlikely. Need clear words to give that effect.

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Administering Compensation Events (1)

3 stages:

notification

quotation

implementation

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Administering Compensation Events – Notification

by Project Manager (2)

Either the Project Manager or the Contractor can notify a compensation event

For compensation events which arise from the Project Manager or the Supervisor giving an instruction, issuing a certificate, changing an earlier decision or correcting an assumption, the Project Manager notifies the Contractor of the compensation event at the time of that communication. He also instructs the Contractor to submit quotations (Core Clause 61.1)

the compensation events include

• the Project Manager’s instructions to change the Works Information

• the Project Manager gives an instruction to stop or not to start work or to change a Key Date

• the Project Manager or the Supervisor changes a decision that he had previously communicated to the Contractor

two elements:

• notify at the same time as giving the relevant communication

• on notification, the Project Manager must also invite the Contractor to submit quotations

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by Project Manager (3)

The Project Manager may also instruct the

Contractor to submit a quotation for a proposed

instruction or a proposed changed decision (Core

Clause 61.2)

What if the Project Manager does not notify a

compensation event? - the Contractor may do so.

The Employer/Project Manager may find

themselves in breach of the fundamental provision

to act in a “spirit of mutual trust and co-operation”

(Core Clause 10.1)

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by Contractor (4)

The Contractor may notify the Project Manager of a compensation event where (Core Clause 61.3)

the Contractor believes that the event is a compensation event; and

the Project Manager has not notified the event to the Contractor

The Contractor must within 8 weeks of becoming aware of the event give that notification. There is however no time limit where the Project Manager should have given the notification

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by Contractor (5)

What if the Contractor fails to comply with the 8 weeks time limit?

he is not entitled to a change in the Prices, the Completion Date or a Key Date unless the Project Manager should have notified the event to the Contractor but did not

however, and arguably, Core Clause 61.3 is not sufficiently plain enough to exclude the Contractor’s rights to claim common law damages if the compensation event also amounts to a breach of the Contract by the Employer

to get round this, some employers have amended Core Clause 61 (via Option Z) to make the 8 weeks limitation a condition precedent

What if the Contractor deliberately avoids forming a belief? - arguably, this is a breach of Core Clause 10 and thus the Contractor would not be entitled to rely on its own wrong to deny that it had formed the requisite belief

Practical tip is that the Contractor should notify all events that he considers to be a compensation event

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by Contractor (6)

Once notified by the Contractor of a compensation event, the Project Manager has to consider whether the event (Core Clause 61.4):

arises from a fault of the Contractor (this would probably include the Contractor’s failure to give early warning)

has not happened and is not expected to happen

has no effect upon Defined Cost, Completion or meeting a Key Date; or

is not one of the compensation events stated in the Contract If the above tests are “passed”, the Project Manager would instruct the

Contractor to submit quotations

if the Project Manager decides otherwise, the Contractor may refer the matter to adjudication

The Project Manager has one week (of the Contractor’s notification) to notify the Contractor of his decision. Failing which, the Contractor may notify the Project Manager of this. Failure to respond within a further two weeks, it is treated that the Project Manager has accepted that the event is a compensation event and instruction to submit quotations

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Administering Compensation Events – Quotations

(7)

Four situations where the Project Manager may instruct the

Contractor to submit quotations:

the Project Manager instructs the Contractor to submit

quotations for a compensation event at the same time as he

notifies the compensation event


quotations for compensation event when he has decided that

the event notified by the Contractor is a compensation event

the Project Manager instructs the Contractor to submit a

revised quotation for a compensation event


quotations for a proposed instruction or changed decision

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(8)

The Contractor has 3 weeks to submit the

quotations (Core Clauses 62.3 & 62.4)

the 3 weeks limitation may be extended by

agreement between the parties before the 3 weeks is

due to expire (Core Clause 62.5)

if the Contractor does not submit its quotations within

the required time, the Project Manager would still be

required to assess the compensation event (Core

Clause 64.1). The basis of the assessment is set out

in Core Clause 63

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(9)

Quotations should include the following (Core Clause 62.2):

details of assessment of the changes to the Prices and the delay to the Completion Date or Key Date

alterations to the Accepted Programme showing the effect of the compensation event

costs and time risk allowances for matters which have a significant chance of occurring and are at the Contractor’s risk under the Contract

alternative quotations where instructed by the Project Manager

alternative quotations for other methods of dealing with the compensation event which the Contractor considers practicable

The Contractor’s assessment should follow Core Clause 63 failing which, the Project Manager can make his own assessment (Core Clause 64.1)

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(10)

The Project Manager has 2 weeks to respond to the quotations which could be one of the following (Core Clause 62.3):

an instruction to submit a revised quotation. This could occur where the Project Manager is of the view that the Contractor has assessed the event incorrectly. In this case, the Project Manager has to give reasons for such instructions and the Contractor has a further 3 weeks to submit the revised quotations

acceptance of the quotation in which case, the compensation event is implemented

a notification that a proposed instruction or a proposed changed decision will not be given

a notification that he will do his own assessment. Of course, Core Clause 64.1 needs to be satisfied

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Administering Compensation Events – Project

Manager’s own assessment (11)

The Project Manager may make his own assessment of the compensation event in the following circumstances (Core Clause 64.1):

the Contractor did not submit his quotations and accompanying details in time (3 week limitation)

the Project Manager decides that the Contractor has not assessed the event correctly and he does not instruct a revised quotation

the Contractor has failed to submit a programme or alterations to a programme with his quotations

the Project Manager does not accept the Contractor’s latest programme

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Impact of Early Warning Procedure (1)

By Core Clause 16.1, the Contractor and the Project

Manager may give an early warning by notifying the

other as soon as it becomes aware of events which

could:-

increase the total of the Prices;

delay Completion;

delay meeting a Key Date; or

impair the performance of the works in use

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Impact of Early Warning Procedure (2)

If the Project Manager decides that the Contractor

did not give an early warning that an experienced

contractor could have notified and the relevant

event becomes a compensation event, the Project

Manager is required to inform the Contractor of such

decision when he instructs the Contractor to submit

quotations (Core Clause 61.5)

the implications of this are that the Contractor will not

be entitled to compensation for the effects of the

compensation event which could have been mitigated

by the early warning

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NEC Cases of Interest (1)

Costain Limited and others v Bechtel Limited and another (2005)

Facts:

Channel Tunnel High-Speed Rail Link Project

The employer was Union Rails (North) Limited (“URN”)

The consortium contractor was CORBER

The project manager was a consortium called Rail Link Engineering (“RLE”) with Bechtel being the leader

In 2002, CORBER entered into an NEC engineering and construction contract with URN for the extension and refurbishment of St Pancras Station

Target cost contract

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CORBER alleged that Bechtel in certifying payments, Bechtel had failed to act impartially. CORBER sought interim injunctions against Bechtel

The issue for the Court was whether in assessing payments to CORBER, the project manager was under a duty to act impartially as between the employer and the contractor or to act in the interests of the employer

Held

It was arguable that when assessing payment, the project manager is under a duty to act impartially

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Anglian Water Services Ltd v Laing O’Rourke Utilities Ltd (2010)

“I have to confess that the task of construing the provisions in

this form of contract [NEC Engineering and Construction

Contract] is not made any easier by the widespread use of the

present tense in its operative provisions. No doubt this

approach to drafting has its adherents within the industry, but,

speaking for myself and from the point of view of a lawyer, it

seems to represent a triumph of form over substance.”

The fact that a contract may be NEC in nature, does not

affect the applicability of the general principles of

interpretation of a contract (RWE Npower Renewables Ltd v

JN Bentley Ltd (2013))

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Thank you for your participation

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